To track the intended -- and more importantly, unintended -- consequences of policies,market movements,buyout deals and regulatory censure. This forum will map the multiplier effect of what may seem minor events initially but spread out far and wide.

December 2010

12/23/2010

On a nippy Friday morning, a Q100 bus cautiously whirred its way on a narrow 4,200-feet bridge, unnamed and unmarked, mounted on the East river across Astoria, packed with women and children. Unlike any other journey, all its passengers are going to the same place and for the same reason – visiting inmates at Rikers Island, the largest penal colony in the world and once considered to be the most violent.

With all its dubious distinctions, Rikers Island is merely 11 miles from the raised torch of Lady Liberty and six from the Empire State Building but could have been light years away. It soaks in nearly $860 million a year from state revenues and yet most people who pay to run it, can’t even place it on a map. May be, they aren’t meant to. The 415-acre island that can house up to 17,000 inmates across its 10 jails, is just a white patch on Google Maps with zilch details.

Sitting across the aisle in the MTA bus, is an Afro-American girl with large golden loops for earrings and a tattoo on her neck that reads “billion dollar bitch.” She would only give me her first name Valerie and says this is her second visit to her father. Another black girl, on the seat right behind us with a blonde Mohawk mane on her head and an “R.I.P” tattoo on her neck, hastened to explain that most of the inmates were either awaiting trial or arranging the bail sum.

A 35-minute ride later, the bus parks next to a sidewalk and the passengers –only Afro-Americans and Hispanics, no exceptions – hasten to queue up for the lockers at the prison entrance to stow away their cell phones, cigarette lighters and “anything sharp, anything inflammable” as Valerie explains. Nearly 90% of the visitors are women.

In one corner, two women are loudly protesting bringing along infants and babies for prison visits. “A child should stay as far away from Rikers as possible. It is bad enough that I have to be here…but definitely not them,” grumbled one while the other nodded in agreement as a bunch of tiny tots played on the gravel.

It was going to be a busy day. Friday, in Rikers lingo, is “everyone’s day” – implying every inmate is allowed visits. On all other days in a month, visits are rationed. Inmates with A-L family names can be visited on December 1, 4, 9 and 12 and so on while M-Z names can have visitors on December 2, 5, 8 and so forth, according to a copy of the jail calendar.

Bought in 1884 for $180,000 by New York City, the original island of 87.5 acres, was expanded by landfill to its current size between the late 19th century to the mid-20th. Besides its 10 facilities – two of these are floating jails or old-time Staten Island ferries that are docked off the northern tip of the island -- the so-called ‘Gotham city’ has numerous support operations such as a central laundry, central bakery, K-9 and Marine units.

The island lock-up, which has morphed into a city on the inside, has also fostered a full economy on the outside. In unintended ways, an economy has sprung up to leech onto the benefits of a captive market of 10,000 correction officers at any given time, about 1500 visitors a day and an inmate population that hovers around 15,000.

Society’s dump

“This is a dumping ground for society’s waste. You clean up New York and turn your face away from this. Most people just refuse to be in any skin other their own,” said Keisha, a 26 year old city-based social worker who has been working with “at-risk children” for six years and was on one of her dozen trips so far to Rikers.

Choosing to be identified by only her first name, she was guarding her colleague’s wallet and cell phone as the latter was inside to counsel a 16-year old girl arrested for felony. “The locker situation here is ridiculous. Isn’t it ironical that the biggest jail should have such easy-to-break-in lockers?” she says, shouting to be heard above the roar of a plane taking off from the LaGuardia airport, which seems just a giant hop away from the island.

According to the New York City Department of Correction, the average daily inmate population in the city fluctuates between 13,000 and 18,000 across its facilities – a figure that exceeds the prison population of many state correctional systems.

Department’s spokesman Stephen Morello refused to accommodate the request to visit the facility as they “simply receive too many journalism student requests to be able to accommodate them.”

Jennifer R Wynn, author of “Inside Rikers” and Assistant Professor of Criminal Justice at LaGuardia Community College, wrote in her book: “Rikers performs an expert magic trick: it disappears people, keeping in those who want to get out and keeping out those who want to get in.” Wynn, who has visited the place for seven years, says that the 10,000 correction officers who make a living off it, were “doing time” in there too.

The memories of Cormac McEnery, a City Island-based lawyer for elder care and estate planning, of Rikers are in stark contrast: his grandfather was the jail warden in 1950s and he has spent his Christmas vacations there, for several years. “I remember running around the grounds with my dog. I used to play on a wooden bench there with my toy trucks and go for Christmas mass in the chapel there,” says McEnery. Other times, he would be learning how to pick locks with some of the inmates just to amuse himself.

He says he wouldn’t be running around on the island today. “It is a different time, different mentality. It is a substantially more violent population,” he said “When you have more people bumping up against each other, there is bound to be more violence.” Many new facilities have been added at Rikers over the years to accommodate a growing influx of inmates and it now has separate prisons for adult males, females, adolescents, AIDS-infected and those requiring psychiatric observation.

With a school, medical clinic, ball fields which holds in-house tournaments, chapels, a gym and a barber shop – they only provide hair cuts and no styling or dyeing -- a power plant, a tailor shop and a bakery inside it, the prison island is virtually a city of its own.

“You need greater compassion, a greater desire to help and a completely non-judgemental outlook when you step into Rikers,” says 77-year old Sister Marian who was the Catholic chaplain for female inmates for 23 years and retired two years back. She campaigned for nearly 17 years to reform the Rockefeller drug laws that imposed stringent imprisonment sentences for selling as little as two ounces of narcotics. “The law was brutal. These women would just languish there for years,” she said.

“Most of them are poor and abused and eager to connect to God. There was no crisis of faith,” she added. Above the prison chapel door hangs sign that simply says 'All Paths to God' and allows inmates to connect with their specific faith. Every facility has four chaplains – one from Protestant church, a Jewish Rabbi, a Muslim clergyman and a Catholic priest. Occasionally, a Buddhist monk or a Hindu priest would be called in if an inmate asked for it.

‘Perverse economy’

Even as Rikers breeds a city within, it has a prison-centric economy on the outside. Keisha said a “perverse economy” was “quietly gaining root around the whole business of incarcerating people” and pointed to a beeline of blue and white mini-vans parked along the sidewalks.

J&J Van Service Inc. is one such private shuttle operator to Rikers which ferries relatives of the inmates from Bronx five days a week for a round trip of $15. It has been in business for 22 years. “3 Travel’s in the same week, the third fare is $9,” advertises its pamphlet. “The higher the crime rate, the better my business does,” said Dennis Cruz, driver of one of the shuttles, “After all, somebody is always getting arrested from spitting in the wrong place to committing homicides.”

Cruz makes 10-12 trips in a day – sometimes more, especially on Fridays -- packing in 5-6 people per trip. “From where I see it, it is a good business to be in. No recession, no lay offs,” he grinned.

There are many others looking at more sophisticated ways to profit from it. Commissioner Schriro’s office panes at the entrance are plastered with fliers from The Fortune Society that is trying to “build people, not prison” and offers courses in Asbestos handling, food safety certification and commercial driver license along with interview and job placement assistance.

Right at the foot of the bridge that leads to Rikers, at the cross of Hazen Street and 19th Avenue, is Ben Hacem Halal food cart that is deftly dishing out meat wraps. “I was told this is the safest place to do business and there is no competition. But the cars just whiz by. I will give it a shot for few more weeks, then decide,” said the truck’s owner Sanchez Drez who moved into this location just 3 days back.

Across the road stands a police depot that sells belts, dresses, knives, pistol cleaning kits and other things that are bought by the correction officers. A pepper spray sale is on with two bottles going for $20. While most items require a valid cop id., there is other stuff for civilians such as teddy bears in NYPD uniforms, baby shoes and bibs with “I love NYDC” logos and t-shirts stamped with “Rikers Island Survivor” motifs.

The block-long line of businesses here includes a cheque cashing facility, a Western Union outlet, an office of Prison Health Services that provides inmate healthcare services and a bevy of warehouses such as a pharmacy and a food catering business that contracts with airlines plying from LaGuardia.

“The rentals are great. The place is safe with so many officers around all the time. These officers are also my biggest customers. They cash their cheques and come right in here,” said Mitchell Williams, a shop owner who sells a variety of fragrances, organic soaps, lamps and clothes in a shop next to cheque cashing counter.

Not all businesses take off though. Williams lucked in when a jewellery store in the same space closed down six months back. Above his shop is an old rusted board of another business that shuttered, called

‘Bad Apple Bail Bonds’ with a tagline “Tired of coming to Rikers? We will get your loved ones out.” If they had money for bail, they wouldn’t be in Rikers, right?

But the place has character. And it will remind you once in a while, in the midst of teeming commerce, of what it essentially is – a place for incarcerates, those reviled and feared by the society.

Even as I turn to leave the shop, a cop enters the shop to buy a special concoction perfume called ‘Desire’ and gets chatty with Williams. I can hear the officer telling the shop owner that a cop at Rikers had his thumb bitten off earlier that day.

“Not just bitten into, it’s bitten off! The thumb of the right hand, the shooting hand! Imagine….and this is the thing that makes us human,” he exclaimed before paying $50 for his bottle of perfume and rushing out. He dashes off in his car across the bridge. He had to report in the same facility where the thumb-biting had happened in another 20 minutes.

12/08/2010

This is the second part in the series profiling a small Wall Street firm that profited from the carnage of the 2008 financial meltdown. As the biggest financial institutions imploded, this tiny start-up bloomed...read on:

By August, 2007, two hedge funds of the fifth-largest investment bank Bear Stearns had melted as news spread that their bets on mortgage-backed securities went awry and French bank BNP Paribus suspended investor withdrawals from three funds saying it couldn't value their assets anymore -- setting off what many experts say the beginning of the most financial meltdown since the Great Depression.

This story, however, is not about those got decimated. Tucked away on the 12th floor of an imposing building on 26 Broadway in downtown New York, a small firm then called ‘Restricted Stock Partners’, with just $2.5 million in profits, had begun to smell blood.

By end of 2008, Bear Stearns had been sold to J.P.Morgan for a paltry $2 per share; mortgage giants Freddie Mac and Fannie Mae had imploded; Lehmann Brothers had filed for bankruptcy; AIG was nationalized as were the Big three – Ford Motors, General Motors and Chrysler – of the auto sector and a $787 billion stimulus package had been prepared to kickstart the economy.

That year, our small firm, now rechristened as ‘Second Market’ made a ten-fold increase in profits to $20 million, expanded its employee base, added new categories of business and was struggling to keep pace with a spectacular surge in business. In 2008 and much of 2009 as the US economy was haemorrhaging, this tiny firm’s profits swelled to $35 million.

So what business was it that nourished Second Market even as others crumbled around it?

Founded in 2004 by entrepreneur Garry Silbert and born-again in the 2008 financial crisis, Second Market has created an online trading platform for buying and selling the most toxic and illiquid of assets that many financial institutions were choking on two years back.

An e-bay kind auction format, this has created markets for categories such as asset-backed securities, mortgage-backed securities, bankruptcy claims and collateralized debt obligations – categories that fund managers didn’t want to touch with a barge-pole after the housing bubble burst.

So are they traders of misfortune? “We are just a market maker. We provide liquidity to assets that would otherwise be stuck on firms’ balance sheets for years,” said Second Market’s head of public affairs Mark Murphy. “We give these investors an exit route.”

The firm claims that it brings transparency to these opaque assets on sale by specifying about what’s inside these asset-backed securities -- information that is vetted by its legal department. “People can decide what level of risk they want to buy into. Earlier, they didn’t know, not even the cleverest of bankers who designed them, what was inside these securities,” said Murphy. referring to all the multiple layers of leveraging that had created so many derivatives that it was hard to know what could lay claim on which physical asset at what value anymore.

In April 2009, it launched a market for trading stock of private companies – a division that will clearly emerge as Second Market’s cash cow in the coming years. Transactions on its hottest private stock, Facebook peg its valuation at $30 billion, topping the market capitalization of the publicly-listed internet giant Yahoo. Trading on the social network firm has already gone past $150 million with an average transaction size of $2 million.

The working is simple: sellers list their wares and buyers go shopping for the deals. Sometimes, buyers list what they are looking for and sellers emerge. Private company stock is usually sold by either big private equity investors or employees who want out. Second Market makes a cut on every transaction – there is no subscription fee but the spread varies from a few basis points to 4-5% in case of private company stock.

The sellers could be any bank, financial institution or pension fund that is stuck with a white elephant asset – too hard to sell, too costly to keep but was once deemed valuable – while the buyers are usually vulture funds and hedge funds which are looking for rich pickings at a huge discount. Sellers either put a stagnant price, a la Craigslist, follow a Dutch auction model where prices are marked down until a buyer emerges.

The firm is regulated by Financial Industry Regulatory Authority and Securities Markets Commission.

In 2000, the average incubation timeline from a start-up to public listing was 4.5-5 years. As investors took flight and the IPO market dehydrated post 2008, it has increased to 10-11 years, explains Murphy. People need to cash out sooner than that. Moreover, if promoters like Facebook’s Mark Zuckerberg are dragging their feet over going public, likelihood of smaller, weaker firms going out is even smaller.

Besides, such private exchange trade helps in price discovery – a sort of book building process – in the pre-IPO stage, gives a valuation benchmark for mergers and PE deals and helps in branding. Second Market also allows companies to exercise significant control over how often their shares will be traded, what disclosures will accompany and if they want to keep certain activist shareholders out, by using their ‘right of first refusal’.

Second Market’s counter-cyclical business model -- Murphy disagrees with the description -- will keep getting traction as long as the economy crawls to a slow recovery. US is expected to turn in 2.1% growth over the next 2-3 years even its banks fail in record numbers and unemployment is at 9.6%.

Second Market this year will likely continue its rally. It had about 23,000 market participants in October up from 6,500 in January this year. In 2005, they had merely 2,500 when Murphy says they "were hustling to get deals." Now they have to hustle their IT and legal departments to keep up with the swelling business.

Bring nimble-footed has served the firm well. In February 2008, $330 billion worth of ‘auction rate securities’ market went illiquid in a matter of days as banks shuttered desks. The e-trading platform firm leapt on the opportunity and created a market – tiding over financial, technological and legal issues – within 10 days. Since then, every few months it has launched new markets and is now considering launching trading in 363 bankruptcy sales, condo-hotels, private REITS and Trust Preferred Securities.

But how will the firm run when the economy runs out of toxic assets?

Murphy disagrees that his firm’s business is “counter-cyclical” and said that even when tap runs dry on toxic assets, private firm stocks will be the main revenue earner especially as they expand to Asian markets of Singapore and Hong Kong.

Counter-party risk, or the risk of someone reneging on a trade, is another aspect but Murphy says that has never happened in any of their transactions so far.

Another pitfall is that it could be harder to keep employees motivated to stick around if they can cash out early. These are all problems companies usually faced when they went public. Now they will face them earlier.

Until any of these problems hit home, Second Market, often counted among the hottest start-ups in US, is on a trot. It has devised and trademarked their ‘Manhattan auction model’ under which the seller sets aside a portion of the sale proceeds, called participation award, that is distributed say the top three or five bidders after the transaction settles. This incentivizes investors to look at illiquid assets and submit an informed bid.

So will Second Market ever list on Second Market? “In this new year, in 2011, we will allow trading in our shares on our website and let the employees cash out,” said Murphy. More importantly, it'll value a company whose business model has no precedent at all...

12/07/2010

This is the first of this two-part series on innovative start-up business ideas in the city of New York that carry the smell of crisp entrepreneurship. Both these firms identified a very basic missing link for smooth functioning of life, in one instance; financial markets in the another and plugged it. Here's their story:

A tiny web start-up called Agent Anything Inc., is plugging New Yorkers with “100 hour work weeks” with college students who are willing to finish their chores and run their errands in return for for petty cash.

Balancing the classic trade-off between either having time or money – but never both together – busy New Yorkers can “create missions” on www.agentanything.com and it is completed by a student “agent” in a jiffy.

Its 23-year old founder Harry Schiff describes the venture as an “eBay of services”. Started in September this year, the platform in its first two months alone has roped in roughly 800 clients with “missions” to dish out –a glorified term for sometimes whacky but mostly drab chores -- and 1000 agents willing to run them.

Source: www.agentanything.com“I realized there are senior citizens, mothers with babies or merchant bankers with 100-hour work weeks who have a to-do list that rolls over everyday. They will gladly pay $10-20-or-30 just to get rid of these jobs. On the other hand, there are these college students who are notoriously low on cash with time to spare,” said Schiff, who hit upon the idea about a year and a half ago when he was a psychology graduate student in the Princeton University.

The tasks run from the mundane – pick up curtains for $20, distribute flyers, walk the pet, unpack and clean for $100 – to more esoteric projects – creating a Wikipedia entry for $30, helping on ‘managerial economics’ homework – and sometimes plain hilarious ones. A lady put up $15 for any one to help find “at least 3 live and healthy land (garden) snails” for her daughter's school project. Someone once posted for an agent “to help convince my friend that Bon Jovi is cool.”

Some of these are “virtual missions” and can be done by any student anywhere in US working out of his laptop or phone – such as data entry or $10 for “finding an unemployed person on government benefits” – while others need to be done in person.

Shawn Hughey, a small business owner in downtown Manhattan who posted a mission on Thanksgiving last week, wants someone to “check on project installation in midtown several times over the next six weeks.” His request for “recurring missions as distinct from one-off requests” is one of the new features that Schiff says they are working on to introduce soon.

In what is essentially the new-age, grown-up and tech-savvy version of going over to your next door neighbour and offering to mow their lawn for small money, this disarmingly simple business concept is catching on, with nearly 260 finished missions at last count.

Competition is sprouting up. TaskRabbit Inc., a firm that currently operates in Boston and San Francisco, is now looking to enter New York City, Chicago and Los Angeles. So far, the territory has virgin, divided and there has been more work that needs to be done in urban lives than runners available.

Screening and filtering , however, is a kill-joy but essential part of the venture. Schiff recalls how they had to pull down a request for “washing and grooming my 392 ferocious dogs.” Another time, the web team ran into an awkwardly-worded request: “I need to someone to come to my house and change a light bulb. Please come, it is very dark in here. If there is food in the fridge, you can have it too.” “You know when someone is messing with you. You just have to take it down,” said Schiff.

The clients pay with their credit card for the finished tasks and a $2.5-$6 service fee. The agents are hired after they show a valid university id since Schiff believes the “university would have done the entire background check and would have their all details.” Ask him about foreign students running missions without a valid work visa and he turns defensive: “The contract is between the client and the agent. We just tell the students that they should have all the documents that they need to do any other usual job here.”

The service is available only in New York currently but is looking to expand to New Jersey, Long Island and Connecticut. “Any big-sized city with a good public transport system (for the students), massive internet penetration (for the clients) will be a good fit,” explained Schiff.

Agent Anything was financed so far with a “few thousand dollars” investment from Schiff’s personal resources and he is in the process of tying in the second round of finances, details of which he declined.

Expanding too fast and tripping on execution is something that Schiff is specifically keen to avoid. “We are always asked why not hire any unemployed person to run these missions? I tell him background checks are costly and we need to resist the temptation of adding agents just to take on more missions,” he said, “We have to make sure we don’t become a Craigslist. Sketchy, opaque and no one knows for sure what’s on offer.”